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Investors are looking at music rights- but innovative financing will change the game

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Musicians selling the rights to their music has become hot news across mainstream media in recent times, with the likes of Bob Dylan, Whitney Houston, and Mick Fleetwood all selling their music catalogs for millions. But why is it that artists are selling at the moment? And are there new forms of finance they could be using that might change the game? 

The historic battle for music rights 

Artists have been fighting over the ownership of their work for decades. Look at Michael Jackson buying the rights to the Beatles in the ‘80s or indeed Prince battling with Warner Bros in the ‘90s, for example. It is clear that control of an artist’s intellectual property (IP) has been a central issue that has been tugged this way and that by the creative and the commercial elements of the music industry for decades now. 

Now, with the streaming boom and industry upheaval catalyzed by the Covid-19 pandemic, the economics of music are changing. With much of the world having been locked down over the past year, the impact on touring and live performing means that artists have been seeking alternative revenue sources for cash flow.

Why are investors taking a look at the music industry? 

With the rise of streaming, the way we consume music, and the way artists make money from it, has been transformed. Streaming, for example, has provided greater stability to music royalty cash flows and brought greater confidence in owning music IP assets and the royalty income derived from them. 

The outlook for the music industry at present is positive; the sector is forecast to grow at a 7 percent compounded annual rate up to 2030 as a result of digitalization. The spread of smartphones, broadband and wealth of new digital platforms means consumers can access almost every song ever recorded, whenever they want. 

The rise in streaming has benefited music catalogues with an increase in value; according to Digital Media Association’s 2020 Streaming Forward Report, music streaming revenues surpassed $10 billion in 2019, representing a 21 percent increase on the previous year- and this is only forecast to continue growing. 

On the Finance side, borrowing is particularly low at present as a result of historically low interest rates, with high-quality, long-term and uncorrelated cashflows attracting many investors to begin to look into music. The lure of reliable, and increasingly valuable returns of evergreen hits is proving strong. 

Music spending has also historically demonstrated little correlation to broader economic activity. Indeed, State of the Music Industry shows music spending and its associated royalties are holding up well compared to other industries during the pandemic. Covid has taught us that, even during downturn, there is always an appetite for such art. This combination of stability, recurring income, attractive yields, and less correlation to wider economic fluctuations makes music an attractive asset class.

Why there is a growing need for innovative finance options 

Even with the rise of the financing options many artists have taken advantage of in the last few months, there remains limited choice for artists seeking liquidity. They must either sell their rights, take an advance from a label or administrator, or acquire bank debt. Traditional capital solutions mean artists usually forego their future income streams and any upside from their rights, or tie themselves up in creative obligations or restrictive covenants, frequently with personal recourse. 

The proliferation of high-profile catalogs has shone a light on the role of the artist as creator, and the ways in which rights to such art is owned and controlled - and by whom. In a catalog sale, artists typically receive their upfront payment but then lose ownership of their rights forever. This extends to all future income streams and value that could accrue in a rapidly growing market. 

Meanwhile, there are also a number of concerns around some funds around how the assets are being valued, and whether music catalogs are being overvalued. Questions have been raised about whether the deals can support the future cash flow investors are expecting to receive.

It is evident that there is growing appetite for empowering artists with a broader range of financing solutions- much as we have seen in other comparable asset classes. Empowerment IP, for example, creates bespoke capital solutions that provide numerous benefits for artists including significant liquidity or capital gains benefits - crucially without selling or losing control of their IP- , and therefore retaining all future upside value. 

This is provided by working with a select number of highly engaged capital partners who are like-minded in their aim to innovate finance in the sports, music, media and entertainment sectors. Through these relationships, Empowerment IP can offer investment opportunities that provide higher yields than some established equity funds with a lower risk relative to full catalog acquisitions (LTV ratios are typically between 50-60 percent). There is an enormous opportunity in the market to structure equitable deals that are both new and attractive to artists, but which also provide high yields to investors.

The road ahead 

The current state of play is unsustainable; artists are the lifeblood of their industry, and must be put first when it comes to rights to their art. This is why IP should- and can- be protected and prioritized whenever a deal is on the table, and why investors must look to innovative financing options as the future of monetizing music rights. 

Stephen Duval, CEO, Empowerment IP